How Blockchain Technology Will Disrupt Financial Services Firms

How Blockchain Technology Will Disrupt Financial Services Firms

 

 

Creating Value through Platforms, People and Technology,”

authors Barry Libert, Megan Beck and Jerry (Yoram) Wind look at how blockchain technology will prove to be a major disruptor to the public and private sectors, starting with the financial services industry. Libert is CEO of OpenMatters and Beck is the chief insights officer. Wind is a Wharton marketing professor and director of Wharton’s SEI Center for Advanced Studies in Management. They also wrote a book called The Network Imperative: How to Survive and Grow in the Age of Digital Business Models. The authors would like to thank LiquidHub for sponsoring the research for this series.

“There are hundreds of startups with a lot of brains and money working on various alternatives to traditional banking.” — Jamie Dimon, JPMorgan Chase

The basic rules of the game for creating and capturing economic value were once fixed in place. For years, or even decades, companies pursued the same old business models (usually selling goods or services, building and renting assets and land, and offering people’s time as services) and tried to execute better than their competitors did. But now, business model disruption is changing the very nature of economic returns and industry definitions. All industries are seeing rapid displacement, disruption, and, in extreme cases, outright destruction. The financial services industry, with its large commercial and investment banks and money managers, is no exception.

“Silicon Valley is coming,” JPMorgan Chase CEO Jamie Dimon warned in his annual letter to shareholders. He said startups are coming for Wall Street, innovating and creating efficiency in areas that are important to companies such as JPMorgan, particularly in the lending and payments space. The payments startup Stripe has a multibillion-dollar valuation and a partnership with Apple Pay. Bitcoin companies and exchanges such as 21 and Coinbase are attracting tens of millions of dollars from venture capitalists. Peer-to-peer lending is booming in the small loan market with many players, including Upstart, Prosper, Funding Circle, and more. And the financial-planning startup LearnVest just got acquired for more than $250 million.

Many of these organizations are in the lending business, but are using big data and cloud technologies rather than tellers and branches to speed lending and customer acquisition. Others are leveraging network business models, such as peer-to-peer lending, to bring together would-be lenders and borrowers. According to Dimon, “We are going to work hard to make our services as seamless and competitive as theirs.” His underlying thought is this: If his company doesn’t keep pace with today’s well-capitalized upstarts, they will begin to lose relevance in a platform-centric world.

“In lots of areas, it looks like the blockchain will replace the current centralized business model of the financial services industry.”

There are many innovative, network business models that are coming after traditional financial services and banking organizations, and big banks are beginning to realize they must evolve in response if they want to remain viable in a digitally centric world — whether it comes by acquiring, partnering or developing leading-edge technologies. But what’s less clear is why, exactly, these new entrants are so disruptive and powerful. What enables them to skirt perceived constraints of these once ‘too large to fail’ incumbents and exploit unseen possibilities? In short, it is network-centered thinking with platform-based business models.

Control Shifting Away from Central Banks

In London’s Canary Wharf, a team of technologists and executives are trying to understand how to use blockchain technology to change the future of banking globally. Their leader is Blythe Masters, an ex-Wall Street commodities trader turned digital entrepreneur focused on turning the mental model and business model of the massive financial services industry and all its related parties (consumers, lawyers, accountants) on its head.

Bank executives worldwide are trying to figure out what this evolution in technology will mean for their firms. “We could go the way that file transfer technology changed music, allowing new businesses like iTunes to emerge. That is why there is such feverish activity at the moment,” said Michael Harte, chief operations and technology officer at Barclays, according to a recent article in The Financial Times. For the massive financial services sector, blockchain technology (the software behind the digital currency, Bitcoin) offers an opportunity to overhaul its existing business model, including its banking infrastructure, approach to settlements and customer interactions. But acting on this opportunity, and making the most of the blockchain, is no easy task given the core beliefs and reinforcing systems that are embedded in the industry.

Networks Are Taking Over

What is the blockchain? It is a distributed database of computers that maintains records and manages transactions. Rather than having a central authority (such as a bank), blockchain uses the network to approve “blocks,” or transactions, which are then added to the “chain” of computer code.  Cryptography is used to keep transactions secure, and the distributed nature of transaction approval makes the system harder to tamper with.

“It is only a matter of time before the broader financial services and banking industries shift to blockchain and network-based approaches.”

Blockchain technology has been hailed by its VC supporters as having revolutionary promise for all involved. “You should be taking this technology as seriously as you should have been taking the development of the Internet in the early 1990’s. It’s analogous to email for money,” said Masters, according to The Financial Times. And blockchain enthusiasts believe that the application possibilities are endless — improving the way we hold and transfer secure goods from money to deeds to music to intellectual property. In fact, blockchain, as a pure platform technology, may be able to cut out the middlemen (or middle companies) everywhere, even disrupting other disruptors like Airbnb or Uber.

In the present financial services business model, a central ledger most often acts as the custodian of that information (such as the Federal Reserve and its member banks). But in a blockchain world, the information regarding each transaction is transparently held in a digitally shared database in the cloud, without a single central body acting as the middleman. This lack of central authority is the very feature that is turning the current mental and business models of traditional financial institutions on their heads.

In a lot of areas, it looks like the blockchain will replace the current centralized business model of the financial services industry and it is easy to see how it could revolutionize all of Wall Street. The ability of the technology to provide an unforgeable record of identity, including the history of an individual’s transactions, is one area being eagerly explored. David Grace, head of global finance at PwC, said that “if you have a secure distributed ledger, it could be used to store validated ‘know your customer’ data on individuals or companies. … It’s a potentially global application that could provide more security over identity data and where that data are stored.”

It seems that the code can perform better than a real middleman in most cases.”

Clearly, we are entering a period of rapid evolution, as the financial services industry determines blockchain and what it means for their business models. Or, another scenario: A slew of startups identifies the possibilities and pulls the rug out from under big institutions. Traditional perceptions about the roles of financial players are already under attack — as it seems that the code can perform better than a real middleman in most cases. Old business models will soon fall prey to the quickly evolving technology and mental models. The network is about to do its magic: Grow and evolve without central control.

Network Business Models Will Dominate

Blockchain is already seeing use outside of the financial services sector, where it got its start. Technology and services giant IBM is adapting the blockchain methodology to develop a currency-less system that could be used for any purpose — for example, executing contracts upon delivery.

Arvind Krishna, senior vice president of IBM Research, believes that in the long run, this technology could facilitate transactions between banks or international businesses. “I want to extend banking to the 3.2 billion people who are going to come into the middle class over the next 15 years,” he said. “So I need a much lower cost of keeping a ledger. Blockchain offers some intriguing possibilities there.” A firm-centered or centrally controlled banking system clearly will not get him there, and the blockchain will allow him to leverage a digitally-enabled network as the way forward.

Join the Network Revolution

With companies such as IBM and JPMorgan Chase, as well as preeminent venture capitalist firm Andreessen Horowitz, backing this new way of facilitating financial transactions, it is only a matter of time before the broader financial services and banking industries shift to blockchain and network-based approaches Twitter  to complement, or replace, the current centralized approach. The question is not whether network business models supported by blockchain technology will disrupt these organizations, but when. So if you are a member of the current financial services industry elite — or a local bank or credit union — it’s time to become part of the digital revolution and join the network and platform-emerging world.

Chuck Reynolds


Marketing Dept
Contributor
Please click either Link to Learn more about -Bitcoin.

David https://markethive.com/david-ogden

What is Siacoin and is it a Good Investment?

What is Siacoin and is it a
Good Investment?

Sia is a platform for decentralized cloud storage.

By allowing the formation of storage contracts with peers, Sia permits its users to store data across a wide network of participants in a secure, private, reliable and fault-tolerant manner. Contracts define the conditions under which a storage provider keeps user data, and require the provider to periodically submit proof of storage to reassure the client that their data is in safe hands. These contracts are stored on the blockchain such that they are publicly auditable. Sia is considered a Bitcoin derivative that includes specialized contract support. Sia’s settlement currency is aptly named Siacoin, and in the future a two-way peg will be implemented in order to financially connect the Bitcoin and Siacoin blockchains.

Sia’s Objective

Sia aims to break into the cloud storage market. The team believe this multi-billion dollar endeavour can be facilitated through blockchain technology. Offering a cheap, reliable and highly redundant cloud storage solution may prove itself worthy of competing with extortionate storage providers at both the individual and enterprise level. Sia’s primary objective is to introduce storage into the sharing economy. As the old adage goes, ‘unused memory is wasted memory;’ the team believes it is possible to liberate the unused storage of the world and unite it into a free market. Under this configuration, data is distributed across a vast network in a highly redundant manner.

This new paradigm for the cloud, where a decentralized network of ad-hoc data centers comprise a global storage solution, is extremely promising. Data remains secure through strong cryptography, storage is far more affordable, and any single point of failure is eliminated through a network of redundant nodes, ensuring the highest possible uptimes. Sia’s affordability and innovation engages competition with even the most venerable service providers.

The Mechanics

Transactions

Sia transactions are somewhat a simplification of Bitcoin’s. They strip away the pay to script mechanism, opting for the multisignature M-of-N scheme for all transactions, the motive being to reduce complexity and therefore attack surface. Some extensions are made to the transaction format to allow for the enforcement of storage contracts, as detailed in the Sia whitepaper. Fundamentally, the concepts are similar to Bitcoin’s; outputs comprise some volume of coins, and inputs are used to reference coin origins.

Proof of Storage

File storage with Sia involves dividing files down into segments of constant size, then hashing them into a Merkle tree. The Merkle tree, along with the size of the file, is used to verify storage proofs. Hosts prove that they have a file in their possession by reporting hashes from that file’s Merkle tree, along with a randomly selected segment of the file itself. The random number generator used to select which segment to send as proof is seeded by the hashed concatenation of the contract ID and the previous block header.

It is assumed that, if a host consistently produces valid proofs, they are storing the whole file. The mathematics here is simple — a ‘cheating’ node storing only 50 percent of a large file will fail to produce a storage proof in 50 percent of cases, meaning that it will take an average of 13 storage proofs until you can be 99.99 percent sure the node is dishonest. The more successful storage proofs, the more confident we are that the node is honest. Nodes are financially deterred from cheating the system because, as we will learn in the next section, if the contract terminates unsuccessfully the node loses its deposit.

Contracts

Contracts are formed between storage providers (otherwise referred to as hosts) and clients. This contract defines the conditions for the storage of data — specifically, the regularity with which the host is required to submit a proof of their continued storage of client data. These proofs must be continually submitted until the contract expires. Contracts are facilitated through a blockchain similar to Bitcoin, but with a few modifications. Hosts are compensated for submitting correct proofs and penalized for incorrect or missing proofs. These proofs are publicly verifiable and present on the blockchain, so network consensus can automatically enforce these contracts. This is significant, since it means that clients do not need to verify their own proofs; the network can do it for them.

Contracts are supplied with some initial funding from both the renter and the host. The money supplied from the renter is to subsidize the host for storing their files, whereas the money supplied from the host is a deposit, that the host will be forced to forfeit if the contract does not complete successfully.

As well as specifying the frequency of proof submission, file contracts define a duration, valid proof reward, invalid proof penalty, and a maximum number of proofs that can be missed. If this number is exceeded, the contract is terminated. The contracts create ‘challenge windows,’ in which hosts are obliged to submit their proofs of storage. These challenge windows work like this; if the host is able to supply a valid proof in the allotted time, an automatic payment is triggered to their ‘valid proof’ address. If they submit an invalid or late proof, the payment instead directs funds to a provably unspendable address, where the coins cannot be recovered. This mechanism is in place to prevent denial of service attacks on Sia nodes.

Feasibility of Attacking the Network

Two attack vectors in particular are mentioned in the Sia whitepaper. These are the so-called “block withholding attacks” and “closed window attacks.” The first of the two attacks, named “block withholding,” exploits the deterministic nature of random numbers on the blockchain. In short, since the execution of file contracts have to be deterministic, miners need to be able to reproduce random numbers with the same seed. Often, previous block header hashes are used as this seed. The idea with a block withholding attack is that an attacker could withhold blocks until they find one whose hash produces a favourable random number, allowing cheating nodes to produce valid proofs without having to store the entire file. This attack is unlikely, due to the fact that over 50 percent of the network needs to withhold blocks to manipulate 50 percent of the challenges.

Fundamentally, this kind of attack is financially unfavourable so they are uncommon in practice. Nevertheless, clients are able to avoid victimization in such a manner by specifying a high proof frequency in their storage contracts. The second, and perhaps more formidable, attack against the network is the “closed window attack.” Consider the scenario where miners decide to maliciously exclude valid storage proofs, resulting in the unnecessary burning of funds. Additionally, where malicious miners dominate the network, it would be possible for them to charge inordinate transaction fees for proofs to be included in blocks. These attacks are called “closed window attacks,” since the window in which clients are required to submit a proof of storage is artificially closed by malicious actors.

This attack is remedied by using a large window size, giving hosts a longer time to have their proofs acknowledged. Hosts can reasonably assume that the majority of the network acts in good faith, and therefore given enough time somebody will include their valid proof in a block. Not only this, but ultimately hosts are free to reject and deny storage contracts as they see fit — if they believe a contract opens them to closed window attacks, they are free to reject it.

Economics of Siacoin

Sia’s settlement currency is Siacoin. Siacoin is an inflationary currency, where supply will increase permanently. Sia uses, and will continue to use, a proof of work scheme. Like Bitcoin, newly minted Siacoins are awarded exclusively to miners as an incentive to keep the network secure. The target block time is approximately 10 minutes, congruent with Bitcoin. The genesis block reward was 300,000 Siacoin, and the network is configured such that this reward decrements until the reward reaches its absolute minimum of 30,000 coins per block.

A post regarding the coin supply from Sia's forum explains:

"By March of 2021, the inflation is about 3.4 percent. by March of 2026, the inflation will be about 2.9 percent. by March of 2036 it will be about 2.2 percent. In the long run, the inflation will be about 2 percent for long time. So in the long run, the inflation rate will probably be lower than the Sia network growth rate besides the lost coins.

In v1.2.x, Sia will implement a host Proof of Burn mechanism in which hosts have to burn certain siacoins to show that they are real and sincere for business to counter the sybil attack. When Sia network is getting mature, the estimate annual burned siacoins can be 0.1 to 0.5 percent of total available siacoins. The burned siacoins will offset the inflation in the long run. At some point, it could result in a deflation of siacoins."

The authors of the Siacoin whitepaper warn of its volatility, with particular reference to its early adoption phase. The volatility in the coin’s value might result in more expensive storage contracts being formed, where hosts hedge against potential losses by increasing their pricing in response to price fluctuations. It is expected that this unpredictability will be tamed once Siacoin and Bitcoin are connected via a two-way peg.

There are two avenues through which somebody can contribute to the Sia network and earn coins. The first, and perhaps the most obvious, is to mine them. Mining coins keeps the network secure by validating transactions. The second method is to become a host. By renting out spare storage, you will be subsidized in Siacoin in accordance to the contracts you agree to. Sia is developed by Nebulous Incorporated, a for-profit organization. The company have expressed their intent to make Sia their primary source of income, which concerns some members of the community. That said, the Sia platform is entirely open-source under the MIT license. The MIT license is renowned for being particularly lenient when it comes to forking and modifying the source code, so perhaps these concerns are unwarranted.

Siacoin and Siafunds

An important distinction between Siacoin and Siafunds needs to be made. Siacoin refers to the coin used, earned and mined by contributors to the Sia platform. On the other hand, Siafunds refers to a different premined coin. This coin represents a stake in the Sia platform as a business venture, rather than an internal currency used by the Sia network. Siafunds are how the Nebulous Corporation aim to generate revenue from Sia’s success as a platform.

Siafunds are used to generate profit proportional to the value of Sia as a platform. Specifically, this is done by imposing a contract creation fee of 4.9 percent. This fee is redistributed to Siafund holders. Siafunds are premined, where approximately 88 percent are held by Nebulous Corporation and the remaining 12 percent by early crowdfund backers of the project. Siafunds are a transferable asset, like Siacoin, but they cannot be used to finance storage contracts or miner fees. In a sense, Siafunds encapsulate a quantity of Siacoin. When Siafunds are transferred from one address to another, a transaction output is generated which contains the number of Siacoin generated from that particular Siafund since its previous movement. So, Siafunds can be thought of as an entitlement to some growing quantity of Siacoin.

The Outlook for SC-BTC

The ticker for Siacoin is SC, and with most of the traded volume coming from the Bisq, Bittrex, Cryptopia, HitBTC, Poloniex, and Yunbi exchanges. The weekly price action is displayed below for SC-BTC on the Poloniex exchange. At the time of writing, SC-BTC traded very close to an important fractal support at 0.00000253, around 0.00000321. The most recent fractal resistance lies at 0.00000838, and given a fractal support just recently formed, we expect SC-BTC begin to trend toward this level. Stronger bullish confirmation will be given if there is a weekly close higher than the base line (red), which lies around 0.00000433. Alternatively, a weekly close below the fractal support at 0.00000253 will point to a long-term bearish outlook for SC-BTC and we recommend to wait for a new floor to be established before committing to a long-term buy in this case.

Conclusion

Sia offers a scalable solution to cloud storage which introduces free memory into the sharing economy. By allowing its users to financially benefit from their spare computer memory, Sia offers unprecedented opportunities for the future of data storage. Blockchain technology has proven to be proliferating in industries where centralized solutions are withering under their deficiencies. Sia has genuine potential to democratize cloud storage, similar to how BitTorrent liberated file sharing. With its high redundancy, infrangible privacy and financial incentivisation, Sia presents an new model for the safekeeping of information where the customer has complete control of their data.

Chuck Reynolds


Marketing Dept
Contributor
Please click either Link to Learn more about -Bitcoin.

David https://markethive.com/david-ogden

The Blockchain: What It Is and Why It Matters

The Blockchain:
What It Is and Why It Matters

Chances are that you’ve heard of bitcoin, the digital currency

that many predict will revolutionize payments – or prove to be a massive fraud – depending on what you read. Bitcoin is an application that runs on the Blockchain, which is ultimately a more interesting and profound innovation. The Blockchain is a secure transaction ledger database that is shared by all parties participating in an established, distributed network of computers. It records and stores every transaction that occurs in the network, essentially eliminating the need for “trusted” third parties such as payment processors. Blockchain proponents often describe the innovation as a “transfer of trust in a trustless world,” referring to the fact that the entities participating in a transaction are not necessarily known to each other yet they exchange value with surety and no third-party validation. For this reason, the Blockchain is a potential game changer.

In 2008, Satoshi Nakamoto, the pseudonymous person or group of people credited with developing bitcoin, released a whitepaper describing the software protocol. Since then, the network has grown and bitcoin has become a recognized unit of value around the globe. Bitcoin is extremely important because it provides a mechanism for accessing the Blockchain – but it’s not the only application that can leverage the platform. Bitcoin has also been on the receiving end of some bad press, such as around the collapse of the Mt. Gox bitcoin exchange earlier last year. The Mt. Gox story is not necessarily an indictment of bitcoin. For the purposes of this post, simply remember this: bitcoin is just a mechanism for transacting on the Blockchain and the Blockchain is the key innovation.

The Blockchain: Trustworthy Transactions in a Trustless World

The Blockchain enables the anonymous exchange of digital assets, such as bitcoin, but it is not technically dependent on bitcoin. The elegance of the Blockchain is that it obviates the need for a central authority to verify trust and the transfer of value. It transfers power and control from large entities to the many, enabling safe, fast, cheaper transactions despite the fact that we may not know the entities we are dealing with.The mechanics of the Blockchain are novel and highly disruptive. As people transact in a Blockchain ecosystem, a public record of all transactions is automatically created. Computers verify each transaction with sophisticated algorithms to confirm the transfer of value and create a historical ledger of all activity. The computers that form the network that are processing the transactions are located throughout the world and importantly are not owned or controlled by any single entity. The process is real-time, and much more secure than relying on a central authority to verify a transaction.

There are many analogous concepts both ancient and modern. Technology has and will continue to transfer power and control from central authorities and distribute them to the masses. For example, time used to be determined and communicated by large clock towers that were expensive to build and maintain. Engineering innovations ultimately decentralized the quantification of time to the individual. Likewise, WhatsApp, a popular cross platform messaging app, cut the transaction cost of sending messages globally – and cut profits for the carriers. The central authority (phone carriers) lost to the application (WhatsApp) built on a decentralized network (i.e. the Internet).

Similarly, third parties that currently verify transactions (the central authority) stand to lose against the Blockchain (the decentralized network). As such, the Blockchain essentially disintermediates these third-party transaction verifiers: auditors, legal services, payment processors, brokerages and other similar organizations. While you may not be convinced that exchanging bitcoin is an invaluable service, there are many other examples of value transfer that are critical – and currently very slow and expensive. Consider the exchange of property: numerous intermediaries are currently involved in this process, such as a third-party escrow service that works for both parties to ensure a smooth transfer. The escrow service, like other services built solely on trust and verification, collect fees that would be mitigated by performing the transaction on the Blockchain – as would wire transfer fees, third party financial auditing, contract execution, etc.

The use case of the Blockchain enabling a decentralized currency exchange – such as bitcoin – is well defined and will likely be the dominant use case near term, however there are a multitude of innovative and disruptive use cases. Companies are already building their own Blockchains for various applications such as Gridcoin that leverages the Blockchain to crowdsource scientific computing projects. Gridcoin uses its own protocols that require much less computing power and electricity to manage than traditional bitcoin networks.

The Blockchain: and Why it Matters (Let’s Not Mess it Up)

The Blockchain is a foundational technology, like TCP/IP, which enables the Internet. And much like the Internet in the late 1990s, we don’t know exactly how the Blockchain will evolve, but evolve it will. Similar to the Internet, the Blockchain must also be allowed to grow unencumbered. This will require careful handling that recognizes the difference between the platform and the applications that run on it. TCP/IP empowers numerous financial applications that are regulated, but TCP/IP is not regulated as a financial instrument. The Blockchain should receive similar consideration. While the predominant use case for the Blockchain today is bitcoin currency exchange that may require regulation, this will change over time.

Had we over-regulated the Internet early on, we would have missed out on many innovations that we can’t imagine living without today. The same is true for the Blockchain. Disruptive technologies rarely fit neatly into existing regulatory considerations, but rigid regulatory frameworks have repeatedly stifled innovation. It’s likely that innovations in the Blockchain will outpace policy, let’s not slow it down.

Chuck Reynolds


Marketing Dept
Contributor
Please click either Link to Learn more about -Bitcoin.

David https://markethive.com/david-ogden

The Ultimate Marketing Machine

The Ultimate Marketing Machine

  • A Strategy & Execution Case

In the past decade, what marketers do to engage customers has changed almost beyond recognition. With the possible exception of information technology, we can’t think of another discipline that has evolved so quickly. Tools and strategies that were cutting-edge just a few years ago are fast becoming obsolete, and new approaches are appearing every day.

Yet in most companies the organizational structure of the marketing function hasn’t changed since the practice of brand management emerged, more than 40 years ago. Hidebound hierarchies from another era are still commonplace.

Marketers understand that their organizations need an overhaul, and many chief marketing officers are tearing up their org charts. But in our research and our work with hundreds of global marketing organizations, we’ve found that those CMOs are struggling with how to draw the new chart. What does the ideal structure look like? Our answer is that this is the wrong question. A simple blueprint does not exist.

Marketing leaders instead must ask, “What values and goals guide our brand strategy, what capabilities drive marketing excellence, and what structures and ways of working will support them?” Any Structure must follow strategy—not the other way around.

To understand what separates the strategies and structures of superior marketing organizations from the rest, EffectiveBrands (now Millward Brown Vermeer)—in partnership with the Association of National Advertisers, the World Federation of Advertisers, Spencer Stuart, Forbes, MetrixLab, and Adobe—initiated Marketing2020, which to our knowledge is the most comprehensive marketing leadership study ever undertaken. Co-author Keith Weed, the CMO of Unilever, is the chairman of the initiative’s advisory board. Todate the study has included in-depth qualitative interviews with more than 350 CEOs, CMOs, and agency heads, and over a dozen CMO roundtables in cities worldwide. We also conducted online quantitative surveys of 10,000-plus marketers from 92 countries. The surveys encompassed more than 80 questions focusing on marketers’ data analytics capabilities, brand strategy, cross-functional and global interactions, and employee training.

We divided the survey respondents into two groups, overperformers, and underperformers, on the basis of their companies’ three-year revenue growth relative to their competitors’. We then compared those two groups’ strategies, structures, and capabilities. Some of what we found should come as no surprise: Companies that are sophisticated in their use of data grow faster, for instance. Nevertheless, the research shed new light on the constellation of brand attributes required for superior marketing performance and on the nature of the organizations that achieve it. It’s clear that “marketing” is no longer a discrete entity (and woe to the company whose marketing is still siloed) but now extends throughout the firm, tapping virtually every function. And while the titles, roles, and responsibilities of marketing leaders vary widely among companies and industries, the challenges they face—and what they must do to succeed—are deeply similar.

Highlights from the Survey

 
Building Needed Capabilities

% of respondents who said that their organization’s training program was tailored to the specific needs of their business

 

 

Winning Characteristics

The framework that follows describes the broad traits of high-performing organizations, as well as specific drivers of organizational effectiveness. Let’s look first at the shared principles of high performers’ marketing approaches.

Big data, deep insights.

Marketers today are awash in customer data, and most are finding narrow ways to use that information—to, say, improve the targeting of messages. Knowing what an individual consumer is doing where and when is now table stakes. High performers in our study are distinguished by their ability to integrate data on what consumers are doing with knowledge of why they’re doing it, which yields new insights into consumers’ needs and how to best meet them. These marketers understand consumers’ basic drives—such as the desire to achieve, to find a partner, and to nurture a child—motivations we call “universal human truths.”

The Nike+ suite of personal fitness products and services, for instance, combines a deep understanding of what makes athletes tick with troves of data. Nike+ incorporates sensor technologies embedded in running shoes and wearable devices that connect with the web, apps for tablets and smartphones, training programs, and social networks. In addition to tracking running routes and times, Nike+ provides motivational feedback and links users to communities of friends, like-minded athletes, and even coaches. Users receive personalized coaching programs that monitor their progress. An aspiring first-time half-marathon runner, say, and a seasoned runner rebounding from an injury will receive very different coaching. People are rewarded for good performance, can post their accomplishments on social media, and can compare their performance with—and learn from—others in the Nike+ community.

Purposeful positioning.

Top brands excel at delivering all three manifestations of brand purpose—functional benefits, or the job the customer buys the brand to do (think of the pick-me-up Starbucks coffee provides); emotional benefits, or how it satisfies a customer’s emotional needs (drinking coffee is a social occasion); and societal benefits, such as sustainability (when coffee is sourced through fair trade). Consider the Unilever Sustainable Living Plan, which defines a set of guiding principles for sustainable growth that emphasize improving health, reducing environmental impact, and enhancing livelihoods. The plan lies at the heart of all Unilever’s brand strategies, as well as its employee and operational strategies.

In addition to engaging customers and inspiring employees, a powerful and clear brand purpose improves alignment throughout the organization and ensures consistent messaging across touchpoints. AkzoNobel’s Dulux, one of the world’s leading paint brands, offers a case in point. In 2006, AkzoNobel was operating a heavily decentralized business structured around local markets, with each local business setting its own brand and business goals and developing its own marketing mix. Not surprisingly, the outcome was inconsistent brand positioning and results; Dulux soared in some markets and floundered in others. In 2008, Dulux’s new global brand team pursued a sweeping program to understand how people perceived the brand across markets, paint’s purpose in their lives, and the human truths that inspired people to color their environments. From China, to India, to the UK, to Brazil, a consistent theme emerged: The colors around us powerfully influence how we feel. Dulux wasn’t selling cans of paint; it was selling “tins of optimism.” This new definition of Dulux’s brand purpose led to a marketing campaign, “Let’s Color.” It enlists volunteers, which now include more than 80% of AkzoNobel employees, and donates paint (more than half a million liters so far) to revitalize run-down urban neighborhoods, from the favelas of Rio to the streets of Jodhpur. In addition to aligning the once-decentralized marketing organization, Dulux’s purpose-driven approach has expanded its share in many markets.

Total experience.

Companies are increasingly enhancing the value of their products by creating customer experiences. Some deepen the customer relationship by leveraging what they know about a given customer to personalize offerings. Others focus on the breadth of the relationship by adding touchpoints. Our research shows that high-performing brands do both—providing what we call “total experience.” In fact, we believe that the most important marketing metric will soon change from “share of wallet” or “share of voice” to “share of experience.”

McCormick, the spices and flavorings firm, emphasizes both depth and breadth in delivering on its promise to “push the art, science, and passion of flavor.” It creates a consistent experience for consumers across numerous physical and digital touchpoints, such as product packaging, branded content like cookbooks, retail stores, and even an interactive service, FlavorPrint, that learns each customer’s taste preferences and makes tailored recipe recommendations. FlavorPrint does for recipes what Netflix has done for movies; its algorithm distills each recipe into a unique flavor profile, which can be matched to a consumer’s taste-preference profile. FlavorPrint can then generate customized e-mails, shopping lists, and recipes optimized for tablets and mobile devices.

Organizing for Growth

Marketing has become too important to be left just to the marketers in a company. We say this not to disparage marketers but to underscore how holistic marketing now is. To deliver a seamless experience, one informed by data and imbued with brand purpose, all employees in the company, from store clerks and phone center reps to IT specialists and the marketing team itself, must share a common vision.

Our research has identified five drivers of organizational effectiveness. The leaders of high-performing companies connect marketing to the business strategy and to the rest of the organization; inspire their organizations by engaging all levels with the brand purpose; focus their people on a few key priorities; organize agile, cross-functional teams; and build the internal capabilities needed for success.

Connecting.

In our work with marketing organizations, we have seen case after case of dysfunctional teamwork, suboptimal collaboration, and lack of shared purpose and trust.

Despite cultural and geographic obstacles, our high-performing marketers avoid such breakdowns for the most part. Their leaders excel at linking their departments to general management and other functions. They create a tight relationship with the CEO, making certain that marketing goals support company goals; bridge organizational silos by integrating marketing and other disciplines; and ensure that global, regional, and local marketing teams work interdependently.

Marketing historically has marched to its own drummer, at best unevenly supporting strategy handed down from headquarters and, more commonly, pursuing brand or marketing goals (such as growing brand equity) that were not directly related to the overall business strategy. Today high-performing marketing leaders don’t just align their department’s activities with company strategy; they actively engage in creating it. From 2006 to 2013, our surveys show, marketing’s influence on strategy development increased by 20 percentage points. And when marketing demonstrates that it is fighting for the same business objectives as its peers, trust and communication strengthen across all functions and, as we shall see, enable the collaboration required for high performance.

Another way companies foster connections is by putting marketing and other functions under a single leader. Motorola’s Eduardo Conrado is the senior VP of both marketing and IT. A year after Antonio Lucio was appointed CMO of Visa, he was invited to also lead HR and tighten the alignment between the company’s strategy and how employees were recruited, developed, retained, and rewarded. CoauthCo-author Weed leads communications and sustainability, as well as marketing, at Unilever. And Herschend Family Entertainment, owner of the Harlem Globetrotters and various theme parks, has recently expanded CMO Eric Lent’s role to chief marketing and consumer technology officer.

Marketing has become too important to be left just to the marketers. All employees, from store clerks to IT specialists, must be engaged in it.

Inspiring.

Inspiration is one of the most underused drivers of effective marketing—and one of the most powerful. Our research shows that high-performing marketers are more likely to engage customers and employees with their brand purpose—and that employees in those organizations are more likely to express pride in the brand.

Inspiration strengthens commitment, of course, but when it’s rooted in a respected brand purpose, all employees will be motivated by the same mission. This enhances collaboration and, as more and more employees come into contact with customers, also helps ensure consistent customer experiences. The payoff is that everyone in the company becomes a de facto member of tCo-authoring team.

The key to inspiring the organization is to do internally what marketing does best externally: create irresistible messages and programs that get everyone on board. At Dulux, that involved handing paint and brushes to thousands of employees and setting them loose on neighborhoods around the world. Unilever’s leadership conducts a quarterly live broadcast with most of the company’s 6,500 marketers to celebrate best brand practices and introduce new tools. In addition, Unilever holds a series of globally coordinated and locally delivered internal and external communications events, called Big Moments, to engage employees and opinion leaders companywide directly with the broader purpose of making sustainable living commonplace. Research shows this has led to a significant increase in employee commitment. Nike has a marketing staffer whose sole job is to tell the original Nike story to all new employees.

Inspiration is so important that many companies, Unilever among them, have begun measuring employees’ brand engagement as a key performance indicator. Google does this by assessing employees’ “Googliness” in performance appraisals to determine how fully people embrace the company’s culture and purpose. And Zappos famously offers new hires $3,000 to leave after four weeks, effectively cutting loose anyone who is not inspired by the company’s obsessive customer focus.

Focusing.

When we asked eight global marketing executives in one organization to list their top five marketing objectives, only two goals made it onto everyone’s list. The remainder was a motley assortment of personal or local objectives. Such misalignment, our data show, increases the farther teams are from an organization’s center of power. With marketing activities ever more dispersed across global companies, that risk must be carefully managed.

By a wide margin, respondents in overperforming companies agreed with the statements “Local marketing understands the global strategy” and “Global marketing understands the local marketing reality.” Winning companies were more likely to measure brands’ success against key performance indicators such as revenue growth and profit and to tie incentives at the local level directly to those KPIs. Ironically, almost all companies were meticulous in planning and executing consumer communication campaigns but failed to devote the same care to internal communications about strategy. That’s a dangerous oversight.

Marc Schroeder, the global marketing head for PepsiCo’s Quaker brand, understood the need for internal cohesiveness when he led a cross-regional “marketing council” to develop and communicate the brand’s first global growth strategy. The council defined a purposeful positioning, nailed down the brand’s global objectives, set a prioritized growth agenda, created clear lines of accountability and incentives, and adopted a performance dashboard that tracked industry measures such as market share and revenue growth. The council communicated the strategy through regional and local team meetings, including those with agencies and retail customers worldwide, and hosted a first-ever global brand stewardship event to educate colleagues. As a result of those efforts, all Quaker marketing plans are now explicitly linked to one overall strategy.

Organizing for agility.

Our research consistently shows that organizational structure, roles, and processes are among the toughest leadership challenges—and that the need for clarity about them is consistently underestimated or even ignored.

We have helped design dozens of marketing organizations. Typically we enter the scene after a traditional business consultancy has done preliminary strategy, cost, and head-count analyses, and our role is to work with the CMO to create and implement a new structure, operating model, and capability-building program. Though we believe there is no ideal organizational blueprint, our experience does suggest a set of operational and design principles that any organization can apply.

Today marketing organizations must leverage global scale but also be nimble, able to plan and execute in a matter of weeks or a few months—and, increasingly, instantaneously. Oreo famously took to Twitter during the blackout at the 2013 Super Bowl, reminding consumers, “You can still dunk in the dark,” making the brand a trending topic during one of the world’s biggest sporting events. That the tweet was designed and approved in minutes was no accident; Oreo deliberately organized and empowered its marketing team for the occasion, bringing agency and brand teams together in a “mission control” room and authorizing them to engage with their audience in real time.

Complex matrixed organizational structures—like those captured in traditional, rigid “Christmas tree” org charts—are giving way to networked organizations characterized by flexible roles, fluid responsibilities, and more relaxed sign-off processes designed for speed. The new structures allow leaders to tap talent as needed from across the organization and assemble teams for specific, often short-term, marketing initiatives. The teams may form, execute, and disband in a matter of weeks or months, depending on the task.

New marketing roles.

As companies expand internationally, they inevitably reorganize to better balance the benefits of global scale with the need for local relevance. Our research shows that, as a result, the vast majority of brands are led much more centrally today than they were a few years ago. Companies are removing middle, often regional, layers and creating specialized “centers of excellence” that guide strategy and share best practices while drawing on needed resources wherever, and at whatever level, they exist in the organization. As companies pursue this approach, roles and processes need to be adapted.

Marketing organizations traditionally have been populated by generalists, but particularly with the rise of social and digital marketing, a profusion of new specialist roles—such as digital privacy analysts and native content editors—are emerging. We have found it useful to categorize marketing roles not by title (as the variety seems infinite) but as belonging to one of three broad types: “think” marketers, who apply analytic capabilities to tasks like data mining, media-mix modeling, and ROI optimization; “do” marketers, who develop content and design and lead production; and “feel” marketers, who focus on consumer interaction and engagement in roles from customer service to social media and online communities.

The networked organization.

A broad array of skills and organizational tiers and functions are represented within each category. CMOs and other marketing executives such as chief experience officers and global brand managers increasingly operate as the orchestrators, assembling cross-functional teams from these three classes of talent to tackle initiatives. Orchestrators brief the teams, ensure that they have the capabilities and resources they need, and oversee performance tracking. To populate a team, the orchestrator and team leader draw from marketing and other functions as well as from outside agencies and consulting firms, balancing the mix of think, do, and feel capabilities in accordance with the team’s mission.

Companies are using this model to create task forces for a range of marketing programs, from integrating online and physical retail experiences to introducing new products. When Unilever launched Project Sunlight—a consumer-engagement program connected with its sustainable living initiative—the team drew talent from seven expertise areas. The international cable company Liberty Global uses task forces to optimize the customer experience at key engagement points—such as when customers receive a bill. These teams are led by managers from a variety of marketing and nonmarketing functions, have different durations, and draw from each of the three talent pools in different measure.

The task-force model is both agile and disciplined. It requires a culture in which central leadership is confident that local teams understand the strategy and will collaborate to execute it. This works well only when everyone in the organization is inspired by the brand purpose and is clear about the goals. Google, Nike, Red Bull, and Amazon all embrace this philosophy. Amazon’s Jeff Bezos captured the ethos when he said at a shareholders’ meeting, “We are stubborn on vision. We are flexible on details.”

Building capabilities.

As we have shown, the most effective marketers lead by connecting, inspiring, focusing, and organizing for agility. But none of those activities can be fully accomplished, or sustained, without the continual building of capabilities. Our research shows pronounced differences in training between high- and low-performing companies, in terms of both quantity and quality.

At a minimum the marketing staff needs expertise in traditional marketing and communications functions—market research, competitive intelligence, media planning, and so forth. But we’ve seen that sometimes even those basic capabilities are lacking. Courses to onboard new staff and teach targeted skills are just the price of entry. The best marketing organizations, including those at Coca-Cola, Unilever, and the Japanese beauty company Shiseido, have invested in dedicated internal marketing academies to create a single marketing language and way of doing marketing.

Senior managers across the company can benefit from programs for sharing expertise on consumer habits, competitor strategy, and retail dynamics. Virgin, Starbucks, and other corporations have created intensive “immersion” programs for this purpose. Executives at the director level can profit from advanced courses that focus on strategic considerations such as portfolio management and partnering. We find that senior leaders often gain a lot in digital and social media training, as they’re frequently less well versed in those areas than their junior colleagues are. Appreciating this, companies including Unilever and Diageo have taken their senior leaders to Facebook for training. We’ve collaborated with partners at Google, MSN, and AOL to develop similar programs, including “reverse mentoring,” which pairs very senior managers with younger staffers. Even the CMO can benefit from continued, targeted training. Visa’s Antonio Lucio, for instance, hired a digital native to teach him about social media and monitor his progress.

Underperforming marketers, on the other hand, underinvest in training. Their employees receive just over half a day of training a year, on average, while overperformers give people nearly two full days of tailored, practical training by external experts. At first blush, the Marketing2020 study reveals what you might expect: Marketers must leverage customer insight, imbue their brands with a brand purpose, and deliver a rich customer experience. They must connect, inspire, focus, organize, and build, as detailed here. The finding that’s striking—and should serve as both a warning and a call to arms—is that most organizations haven’t been able to put all those pieces together. Our data show that only half of even high-performing organizations excel on some of these capabilities. But that shouldn’t be discouraging; rather, it illuminates where there’s work to do. Regardless of how marketing delivers its messages in the future, the fundamental human motivations that marketers must satisfy won’t change. The challenge now is to create organizations that can truly speak to those needs.

David Ogden
Helping People Help Themselves

David https://markethive.com/david-ogden